Eurozone enters deflation giving Draghi upper hand

Chris Papadopoullos was City A.M.'s economics reporter until February 2016.

Follow Chris

Chris Papadopoullos

Shoppers in the Eurozone are seeing lower prices – yet this reflects their economic troubles

THE EUROZONE has slipped into deflation as prices fell by 0.2 per cent year-on-year in December.

It marks a significant fall from November when prices rose by 0.3 per cent, according to Europe’s official statistical office Eurostat.

Economists have raised their expectations that the European Central Bank (ECB) will begin a large programme of asset purchases, or quantitative easing.

“This will surely set the seal on the ECB’s much-anticipated introduction of quantitative easing and could serve to silence, or at the very least mollify, likely governing council dissenters,” said Nick Beecroft, senior market analyst at Saxo Capital Markets.

ECB chief Mario Draghi has signalled for a number of months that the ECB is prepared to buy government bonds if the ECB should risk missing its mandate. Its target is near to but not above two per cent inflation. However, he has faced opposition from his German counterparts such a Jens Weidmann.

Opponents view asset purchases as a form of bailout that encourages politicians to be profligate instead of making difficult and unpopular reforms and cuts.

“We see a very high probability that the ECB will scale up its asset purchases shortly, probably on 22 January,” said Holger Schmieding, chief economist at investment bank Berenberg.

The drop in inflation appears to be primarily down to falling energy prices. Non-energy inflation remained at 0.6 per cent.

Schmieding does not believe the Eurozone will enter a deflationary spiral in which consumers stop spending, prices keep falling and consumers react by delaying purchases further.

However, Schmieding expects inflation to hit minus 0.5 per cent in January and February. The current figures mark the lowest rate of inflation seen in the currency union since 2009.